Wesco Incorporated\'s only product is a combination fertilizer/weedkiller called

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Wesco Incorporated's only product is a combination fertilizer/weedkiller called GrowNWeed. GrowNWeed is sold nationwide to retail nurseries and garden stores. Zwinger Nursery plans to sell a similar fertilizer/weedkiller compound through its regional nursery chain under its own private label Zwinger does not have manufacturing facilities of its own, so it has asked Wesco (and several other companies) to submit a bid for manufacturing and delivering a 35,000-pound order of the private brand compound to Zwinger. While the chemical composition of the Zwinger compound differs from that of GrowNWeed, the manufacturing processes are very similar. The Zwinger compound would be produced in 1,000-pound lots. Each lot would require 38 direct labor-hours and the following chemicals: Quantity in Pounds 340 260 140 260 Chenicals AG-5 KL-2 DP-6 The first three chemicals (AG-5, KL-2, and CW-7) are all used in the production of GrowNWeed. DF-6 was used in another compound that Wesco discontinued several months ago. The supply of DF-6 that Wesco had on hand when the other compound was discontinued was not discarded. Wesco could sell its supply of DF-6 at the prevailing market price less $0.11 per pound selling and handling expenses. Wesco also has on hand a chemical called BH-3, which was manufactured for use in another product that is no longer produced. BH-3 which cannot be used in GrowNWeed, can be substituted for AG-5 on a one-for-one basis without affecting the quality of the Zwinger compound. The BH-3 in inventory has a salvage value of $580. Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below Actual Pric Per Pound Current Market Price per Pounds in Purchased AG-5 KL-2 18,000 5.600 s 0.73 s 0.46 $ 0.83 s 0.51

Explanation / Answer

Direct Materials AG-5 : 340 pounds per lot * 35 lots = 11900 pounds Substitute BH-3 on a one to one basis. BH-3 is not used in this order, the same will be salvaged for $ 580. Therefore, cost would be $580 Remaining pounds 5700 would be AG-5 at a cost of $ 0.83 per pound 4731 (11900-6200) 5700 KL-2: 260*38 = 9100 pounds at 0.51 4641 (9880*0.51) CW-7: 140*35 = 4900 pounds at 1.52 per pound 7448 DF-6 : 260*35 = 9880 pounds. Use 7700 pounds at 0.45 (0.56-0.11) 3465 Remaining pounds to be purchased 1400 @ 0.54 777.6 Direct material cost $21,643   Direct labor: 38* 35 = 1330 direct labor hours. Because only 450 hours can be scheduled, for the remaining overtime will be used 380*12 4560 880*18 15840 Direct Labor cost 20400 Variable overhead would change, this order would change fixed overhead 1330*4.30 5719 Total cost of special order $47,762 The lowest price that Wesco could bid for the order is $47762 Direct material cost : The initial order would exhaust the existing inventories of BH-3 and DH-6 and new supplies of raw materials will have to be purchased at the market price AG-5 - (340*35*0.83) 9877 KL-2 -(260*35*0.51) 4641 CW-7 (140*35*1.52) 7448 DF-6 (260*35*0.56) 5096 Direct Material costs 27062 Direct Labor: 60% of 1330 hours can be done at regular time but remaining must be done on overtime 798 Regular Time 798*12 9576 Overtime premium 532*18 9576 Labor Costs 19152 Variable manufacturing overhead (1330*11.80) 15694 Total Costs 61908 Mark up(40%*61908) 24763.2 Selling Price 86671.2

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